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East African economies raise spending, risks seen

East Africa's economies present higher budgets for the next financial year with Kenya planning to spend more on security in the face of upcoming elections and al-Shabaab threats.

NAIROBI, KENYA (JUNE 14, 2012) (REUTERS) -

The three main East African economies raised their spending plans for the 2012/13 fiscal year to fund construction of roads and power plants, but analysts faulted their finance ministers' sunny dispositions on the economy.

Officials in Kenya, Uganda and Tanzania face the challenge of maintaining their recent economic growth rates - among the fastest in Africa - amid global economic uncertainties as well as high inflation and weak currencies at home.

Their finance ministers justified the jump in spending for the financial year starting next month by raising planned investment in the construction of roads, railways and power plants, key to continued economic growth.

Tanzania cut its growth forecast for this year to 6.8 percent from an earlier forecast of 7 percent, citing chronic energy shortages and drought, while Kenya maintained its growth forecast for the year at 5.2 percent.

On top of the generous allocations to the infrastructure sector, Kenya has set aside 3.9 billion shillings for the police and security forces.

The country goes to the first election since disputed results of the last one led to violence and Kenya's defence forces are in southern Somalia, hunting down al-Qaeda linked islamist group, al-Shabaab, a move that has drawn retaliatory attacks on Kenyan soil that have killed several people.

Nairobi based economist James Shikwati said the government may look for financial room in the allocation to security, where details are largely kept secret and are not closely scrutinized by the public.

"In terms of budgetary allocation to security, actually I would say there are two voices: there is a voice that says really this may not be necessary, you know the region allocates a lot of money to security to import jet fighters and other military hardware and yet they are not really at war. So there is a voice that says that is not right, they should be allocating more towards productivity. But we know when it comes to national security issues the public is not allowed to scrutinize, so the leadership have always had the incentive to allocate more money to the security docket not necessarily because they are keen on really giving security but that is a place where they can at least dip their hands in without scrutiny," Shikwati said.

The travel industry says the military engagement in Somalia and the revenge attacks have already led to cancellations of holidays and business trips by foreigners to Kenya.

Maria Kiwanuka, the Ugandan finance minister proposed to raise taxes on people who earn more than 120 million shillings a year, while raising withholding tax for investment on government securities to 20 percent from 15 percent.

Traders said the move would put off foreign investors, a key source of hard currency that keeps the shilling from weakening steeply against the dollar, thus raising costs of imports.

She made recommendations on improving local investment by developing infrastructure and agriculture.

"The four main strategies to lower the cost of doing business and marshal private investment in Uganda are rehabilitation and expansion of road and electricity infrastructure to reduce transport cost and improve access to affordable energy to support the private sector as an engine of growth, research and development to improve productivity such as developing improved seeds and other agricultural inputs, provision of extension services in the field and skilling our work force to operate agro processing industries," Kiwanuka said.

"There is also that quest to push for industrialisation, what we call productive elements of the economy. So there is going to be a lot of focus on agriculture, for issues of food security and focus on of course industrialisation which is value addition within the countries in order for them to try to create a balance of payments," said Shikwati.

In Rwanda, real GDP growth is projected at 7.7 percent in 2012 and is estimated to remain strong over the medium term, averaging not less than 7.3 percent a year in the next three years.